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Tired? - In Its 10th Reversal of the Federal Circuit Since 2002, the Supreme Court's Reinforcement of the Exhaustion Doctrine

Intellectual Property Update

June 10, 2008

Showing no signs of tiring of a pattern of reversing the Court of Appeals for the Federal Circuit, yesterday, the United States Supreme Court reversed the Federal Circuit for the tenth time (out of ten cases) since 2002. In Quanta Computers, Inc. v. LG Electronics Inc., 553 U.S. ____ (2008), the Supreme Court unanimously held that an "authorized sale of an article that substantially embodies a patent exhausts the patent holder's rights and prevents the patent holder from invoking patent law to control postsale use of the article." Specifically, the Court addressed the application of the exhaustion doctrine to method claims.

LG Electronics ("LGE") authorized Intel to manufacture and sell microprocessors and chipsets using the LGE patents under a license agreement. A separate agreement between LGE and Intel required Intel to give its customers written notice that the license did not extend to a product made by combining an Intel product with a non-Intel product. The three LGE patents that were at the center of the controversy claimed various methods of interaction between a computer main memory and cache memory. None of LGE's patents claimed the actual products but instead claimed the method. Quanta Computers, Inc. purchased microprocessors and chipsets from Intel, and then manufactured computers using Intel products in combination with non-Intel products. LGE filed suit against Quanta, asserting that this combination infringed the LGE method patents.

The District Court ultimately ruled in LGE's favor holding that the patent exhaustion doctrine did not apply to method claims. The Court of Appeals for the Federal Circuit affirmed. The Supreme Court reversed the Federal Circuit, holding that the longstanding doctrine of patent exhaustion applied so that LGE can no longer assert its method claims against Quanta.

The doctrine provides that the initial sale of a patented product terminates all patent rights to that product, including method claims covering such product. The Supreme Court quickly dismissed LGE's argument that method claims cannot be exhausted. Rather, the Court noted that it has repeatedly held that method claims were exhausted by the sale of a product that embodied the method. Moreover, the exhaustion turned on LGE's license with Intel which allowed Intel to sell products practicing the LGE patents without any restrictions, and as a result, Intel was authorized to sell its products to Quanta.

In conclusion, the Supreme Court's decision reinforces that the exhaustion of patent doctrine applies to all claims, including method claims. The authorized sale of a product that "substantially embodies" a patent exhausts the patent holder's rights and prevents the patent holder from invoking patent law to control postsale use of the product. Patentees cannot rely on process patents providing for downstream royalty without explicitly providing for this restriction under the original license agreement. For example, LGE could have included a provision in the license agreement with Intel restricting Intel to sell the microprocessors and chipsets to third parties seeking to combine these with non-Intel products unless Intel first required the purchaser to pay a royalty on such products. Had the agreement contained such a provision, the Supreme Court may have decided the case differently, as it noted that "[n]othing in the Licensing Agreement between LGE and Intel restricts Intel's right to sell its microprocessors and chipsets to purchasers who intend to combine them with non-Intel parts."